I have an iPod Touch / iTouch, not an iPhone. I recently ugraded to v1.1.3 of the firmware, v7.whatever of iTunes, and added the $20 set of apps.
Ever since, I regularly get a dialog box on connecting my device that says "iPhone not recognized, disconnect and try again."
How frickin annoying. It almost certainly has to do with bugs in the new downloads, as it never happened before I upgraded.
Anyway, here's the best I've been able to figure out re: making it go away:
1) Make sure the device is awake. That also means don't let it suspend/sleep while waiting for a sync.
2) Make sure the device is on the main menu, i.e. not doing anything else.
3) Close iTunes.
4) Now, connect.
When these 3 conditions are met, I think thus far it's worked 100% of the time. There seems to be a large delay, and I think that might be the problem - if there's other things running, then perhaps the long delay tips over the "timeout" line and you get the message. Just a thought. For my previous ipods, the minute you connected the device it would be recognized, at least by Windows, even though it might take a little while for iTunes to come up. But with this one you plug it in and you can sit and watch while you wait for it to switch to "Syncing..." mode.
Hope that helps!